Lending Club Had Their First Down Month Since Feb 2011, Should Investors Care?

Until April Lending Club updated their loan statistics every day. But in preparation for their upcoming IPO they moved to a quarterly update cycle instead of daily. So now, we have to wait several weeks after the end of the quarter before we can see the full loan data for loans Lending Club issued in that quarter.

So, in mid-August Lending Club quietly updated the data file on their Download page. Soon after I downloaded the updated 2014 data and started doing some digging. There were plenty of surprises here. So, I reached out to Lending Club (pre-IPO announcement) to get some comments.

But before we get to these comments take a look at the 18-month chart below. The second quarter of 2014 is certainly bucking the smooth growth trend that we have come to expect from Lending Club.

The thing that surprised me the most was that June was a down month at Lending Club as far as loan volume goes. This is the first down month in loan volume at Lending Club since February 2011. I know that CEO Renaud Laplanche has been very proud of Lending Club’s consistent growth trajectory so I certainly wasn’t expecting this when I started analyzing the numbers.

When we look at the month over month growth at Lending Club we see a very consistent pattern until the second quarter. Most months show between a 5% and 10% growth over the previous month. So, I asked about this and other interesting data from their second quarter numbers.

The Down Month in June

The biggest surprise here turned out to have a very simple explanation. Lending Club is no longer focusing on monthly origination growth. Instead they are now driven by quarterly numbers. So, showing consistent monthly growth in loan volume is not that important any more. Rest assured, we can continue to expect strong quarterly loan growth from Lending Club going forward.

This movement to a quarterly focus is evident on their statistics page – the chart below used to show monthly originations, it now shows quarterly numbers. And the quarterly growth has been impressive – $1.01 billion in Q2 up from $791 million in Q1.

Small Business Loans

Lending Club is not sharing any details of their small business loan volume, at least not yet. But that doesn’t mean we can’t glean some information from their public data.

I have told you about Policy Code 2 loans before. They are basically loans that fall outside of Lending Club’s primary underwriting model. Well, these small business loans have been deemed Policy Code 2 loans, a category that also includes some consumer loans.

So, we have no way of knowing the exact volume number small business loans. We do know Lending Club started their dedicated small business loan program in March and Laplanche stated on a recent Lend Academy Podcast that they would be growing this business somewhat slowly.

This is what we can tell from the data. We know the maximum amount for consumer loans is $35,000 and for small business loans it is $100,000. We know that Lending Club made 207 loans of greater than $35,000 in the second quarter totaling $11.4 million. These were Policy Code 2 loans that we can assume are all small business loans. Lending Club would not confirm or deny this.

We also know there would have been many small business loans of less than $35,000 but we cannot differentiate these loans from consumer loans. So, it looks like Lending Club’s small business lending operation is gaining steam although it likely represents just 1-2% of the total second quarter loan volume.

Springstone Financial Loans

In April Lending Club made their first acquisition – they purchased Springstone Financial for $140 million. Springstone is a consumer lender focused on patient financing and private school education loans. Lending Club confirmed that these loans are now included in their download as Policy Code 2 loans.

We can see some of these loans because many are less than $1,000 and that is the minimum to obtain a loan through Lending Club’s platform. In fact, there were 1,117 loans of less than $1,000 in the second quarter – we can assume these were all Springstone Financial loans.

A Statistical Snapshot of the 2nd Quarter Data

These many small medical loans have meant that Lending Club’s average loan size has dropped to the lowest number since 2011. This happened despite the fact that small business loans up to $100,000 are now included in this average. Another interesting data point is the huge increase in Policy Code 2 loans. This is mainly because they now include all small business and Springstone loans in that group.

Average loan size: $12,241

Total Policy Code 2 loans: $285.9 million (28.5% of the total)

These next three data points are only for Policy Code 1 loans – the regular Lending Club loans.It is not surprising that the percentage of whole loans continues to rise but the interest rate and loan term breakdown are remaining consistent. The average FICO has dropped slightly over previous periods.

Percentage 36/60 month loans: 68.4%/31.6%

Average interest rate: 14.08%

Percentage of whole loans: 57.2%

Average FICO score: 695

While Lending Club will continue to make their loan data available it is difficult to learn much about their new lines of business from this data. As Lending Club transitions to become a public company they are changing the way they are sharing data. We will continue to be able to analyze Lending Club’s core consumer loans data but getting much meaningful information about the rest of their business will likely be difficult.

A few dropped points of FICO is not necessarily a simple widening of their credit standards to hit numbers. There is moreso a complex soup involved with underwriting that involves all sorts of factors of borrower quality. While we may have lost a point or whatever, there might be a large number of 36-month low-dollar loans that allow lower FICOs. The overall quality may have even gone up. We don’t know. A better metric is what Lending Club cites in their S-1, which is the default rate trend.

I feel a more interesting point is Peter’s highlight of Lending Club focusing more on quarterly rather than monthly trends, as seen in June’s dropped numbers. For me, this hints that there is a bit of origination-management going on. In my view, they should simply do good work, and care less about looking perfect. But perhaps I’m being idealistic. There’s a certain etiquette involved with Wall Street finance (timing market windows, etc), so perhaps this degree of management is justified in the long run.

Also, I’m interested in the ever-widening pool of Policy 2. Peter, do you think Policy 2 is becoming less of a “testing grounds” that it originally was, and more of a catch-all? Is it possible Policy 2 will eventually be 50-60% of Lending Club’s volume?

This was actually my take-away as well. As Simon mentioned, for something that was ground for testing, this is starting to look like a means to actually to exclude the greater population from various investments options outside of the testing realm.

Going back to a year ago, the following numbers were in a chart provided by Peter:

2013:
July: 1.6%
August: 5.4%
September: 7.6%
October: 8.2%

And here we are 6-9 months later, looking at 28.5%. We had a discussion in the after the same post with those figures, and your thoughts Peter, which I agreed with at the time, were that they wouldn’t have impacted the top-line numbers or growth percentages if they didn’t exist. At this point I’m not sure we can make the same conclusion. Your thoughts Peter?

Writing2reality, Policy Code 2 loans started as a program for F and G grade borrowers that had one or two issues on their credit report that denied their application under LC’s regular underwriting model.

This definition is no longer true. Those loans are still being issued but also included now are small business loans, medical loans and private school loans. Clearly, they are impacting the growth percentages now.

What we don’t know is if LC would have achieved similar growth without them. My sense is growth would have been slower but if they had moved more resources to Policy Code 1 loans they would have issued many more of those loans.

Simon, Yes, I think a more natural and organic approach to originations would be preferred. But few companies buck the Wall Street demands for every increasing quarterly growth.

As for Policy Code 2 it seems to not really be a second policy but more of a catch-all for everything that doesn’t fit their standard underwriting model. So, if they keep this up I think we will easily see the number get to 50% or more within 12 months. I would like to see them break the different categories out but they may not want to do this for competitive reasons.

At what point does the current “standard” no longer get discussed or viewed as the standard underwriting model? When policy code 2 loans are 50% or more? And given a 50% split, where would the majority of revenues come from, Code 1 or 2. I’m presuming origination fees are higher as a percentage for business loans than personal loans.

That is a fair question. Lending Club has made this call – lumping everything other than their regular consumer loans into Policy Code 2. I would like to see LC split the different kinds of loans out in their public download but I don’t think that is likely. And yes small business loans have slightly higher origination fees (at the top end).

Fair enough. This does, however, bring up a new set of questions then. Can Lending Club still promote the fact that they are a transparent open-data company when the majority of their loan data is curtained off? I don’t think so. In my view, this commitment to open data is what ultimately made them so loved in the public’s eye (IE: David Snitkof’s recent post on the IPO tells how the open data is partly what inspired Orchard’s genesis). Lending Club may gain a competitive advantage by making non-Policy 2 a minority aspect of their company, but their darling status by independent investors like myself will certainly take a hit.

I think the transparency we have enjoyed for many years is going to reduce unfortunately. While I very much doubt it will be removed completely, because Renaud likes to talk about transparency a lot, we have seen a steady reduction in transparency for the past 12 months or more. The impact this will have on public opinion remains to be seen but I think as long as returns hold up investors will stay.

If you look at the canned charts on NSR and daily funding you see a sharp drop off the last 3 business days for June. Probably only 15-20 million in total though from average. Will be interesting to see they next quarter update and see how July starts out.

That is very interesting. I hadn’t looked at that chart yet. Those were the three lowest days of the quarter. Looks to me like they were holding some loans back until the third quarter because they had already hit their quarterly numbers for Q2.

Good point Fred. To the average LC investor a down month is pretty much irrelevant. But there are many people who are following the company closely as they approach their IPO and for these people a down month is particularly noteworthy.

I’m sorry, but shouldn’t there be some acknowledgement that you, Peter, sat on this information for “several” weeks without saying a word? Not one word.

Shouldn’t there be some explanation as to why positive numbers have been reported within 2 days for the last 39 consecutive months…………….but the first potentially negative number after three & a half years goes unacknowledged & unreported for 25+ days?

Long time Lendacademy forum member “Core” points out that this “silence” from Peter when some potentially negative news occurs has in fact occurred before & more importantly, has in fact cost some readers here MONEY. See here:

Dan, I’ve enjoyed your colorful commentary over the years, but this comes across as a bit entitled. Every investor has access to the same set of open data. If monthly origination was so important to you, there was no need to wait on anybody to find it out. Four clicks over at NSR would have done the trick.

You have a lot of gall asking me this question when my posts are now subject to “moderation” before they are being allowed on your site, I’ve been here for 5 years & that has never been the case prior to today. Despite your many protestations to the contrary, your actions here indicate that opposing views aren’t truly welcome & a restriction in posting privileges is the only reward for dissent.

Dan, Let’s not rush to judgment here. I can promise you that was not something I did. I have no idea why your previous comment was held for moderation – it was something WordPress did. It somehow thought you were using a new machine or something.

As you can see your latest comment was published immediately. I have always welcomed dissenting views that are respectful and will continue to do so.

That is an odd, bordering on supernatural explanation. I’m far from a computer expert, but consider that I’ve lived in the same location for over 20 years, only post from home & have never in my life posted from a cell phone. My newest computer is 3 years old & it is the one I’ve been using exclusively to post for at least the past year. I’d also bet serious money that my IP address hasn’t just changed in the last several days since my last post. So……………….

Though some people might look at all this & say that it sounds like a high tech version of the “my dog ate my homework” excuse, I nevertheless am happy to withdraw my accusation that you had personally restricted my posting privileges.

As for any further commentary on my part regarding the subject matter, I’ll certainly consider doing that when I feel that you have adequately responded to the comments posted by myself, Core & others on the issues we’ve brought up here & on the forum regarding all this.

And just for the record for everyone else. The comments of first timers are always held for moderation (as a spam prevention). If you use the same IP address after your first comment new comments are posted automatically.

Dan, Someone just contacted me offline. The reason your post was held for moderation is because it had three links in it. Nothing to do with your IP address. More than two links in a post will cause it to be held for moderation.

I can see I am late to this party. Dan mentioned he’s no computer expert, but I am. And a spam filter expert too. I was about to say, even before I saw Peter’s latest reply, that it was likely the links that caused the moderation flag.

I’m glad that Peter approved the post, but honestly I expected nothing less. Peter may be many things, but generally a post-deleter he is not.. USUALLY. If something needs deleted he has his droog puppy do it rather than stand up to it himself. And Dan, your post contained nothing that I thought would have triggered that. Your post was pretty sterile, I thought. But then again I have some unique standards as to what I believe is civil.

As for what I think about the rest of this, I am undecided. One thing is sure; Lending Club is playing GAMES with their numbers, but they have been for years so that’s not even worth talking about here.

There is absolutely no positive spin you can put on a sequential monthly volume decline. Esp given the imminent IPO. Managing quarterly numbers vs monthlies? Bollocks mate. This, very simply, is a market, that is becoming highly competitive…not just other P2P players but the credit card companies grabbing people back. More growth creates more consumer awareness and more price shopping. Great for borrowers! Investors…I am not so sure. But this decline is a red flag for the LC hockey stick story, which heretofore was as solid as a brick wall. Times are a changing for King Renault. Congrats Vermuts!

That was not my take but I can see how many will look at a down month and read all kinds of negatives. It will be interesting to see whether the Wall Street analysts jump on this or not. As I said above, my take is the LC hockey story continues but it is now updated quarterly and not monthly.

Couldn’t agree more with you RawRaw. To go from zero to almost 30% of originations in a year is a significant departure from the transparent portion of the business and certainly has a material affect on the “growth” seen over the past 12 months.

Thank you Peter for enlightening us to the goings on.
As a simple investor, I have noticed of late that the number of overall loans to choose from at one time, has gone down to the couple to few hundred level, as well as the filters I use, which used to produce higher percentage returns, has gone down as well to the single digits, a few percentages lower than recently.
Wonder what truly is going on w/LC to reduce number of loans to choose from, reduce returns, and not let investors see which these small business loans are- separating them- as a ties 2, yet, not informing investors of the changes…
Will be staying tuned, and investing more carefully.
Any and all inputs are certainly always appreciated, as well as any advice on how to inves for more automatic and better returns:)

Thank you Peter for enlightening us to the goings on.
As a simple investor, I have noticed of late that the number of overall loans to choose from at one time, has gone down to the couple to few hundred level, as well as the filters I use, which used to produce higher percentage returns, has gone down as well to the single digits, a few percentages lower than recently.
Wonder what truly is going on w/LC to reduce number of loans to choose from, reduce returns, and not let investors see which these small business loans are- separating them- as a tier 2, yet, not informing investors of any of the changes…
Will be staying tuned, and investing more carefully.
Any and all inputs are certainly always appreciated, as well as any advice on how to invest for more automatic and better returns:)

The Lend Academy Podcast

Archives

About Lend Academy

Lend Academy has been bringing you all the news and information about peer to peer lending since 2010. Founded by Peter Renton, Lend Academy not only has the most active news site, but also the largest online forum and the first and most popular podcast in the industry.

The Lend Academy team loves peer to peer lending and our staff have all invested their own personal money in one or more of the platforms. Lend Academy Media is part of Cardinal Rose Group which also owns LendIt, the leading industry conference, and has a majority interest in NSR Invest.